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Fiscal year 2017/18

Letter from the Executive Board

Mannheim, 23 April 2018
Dear shareholders,
Südzucker AG is looking back on an eventful fiscal year 2017/18, and one that will be at least as eventful has begun. This includes on the one hand routine attacks on our product sugar, by almost all media channels – newspapers, television and social media – and on the other, a completely changed market environment for the sugar segment, with dramatically lower sugar prices. At first glance, this is not yet apparent from the numbers for the fiscal year just ended: group consolidated earnings rose substantially, to € 7.0 (6.5) billion, and the operating result of € 445 (426) million is also higher than last year.
Based on this result, we – together with the supervisory board – will recommend that the dividend paid remain unchanged at € 0.45 per share. We have thus maintained a consistent, long-term corporate development-oriented dividend policy.
Let us now turn to the sugar segment:
Over the past few years we have prepared well for the – we believe historic – upheaval in the European sugar market. Minimum beet price and production quota regulations were eliminated on 1 October 2017 and so we have been operating under new market conditions for almost half a year.
Instead of minimum beet prices, we now have a flexible beet procurement contract and payment system, which we developed together with beet growers, and which has been well accepted right from the start. For the 2017 campaign, we increased the year-over-year group-wide beet cultivation area by about 16 %. We had to do this in order to achieve our objective of better loading our sugar factories, thereby cutting our fixed costs per tonne of sugar. With an average campaign duration of 133 (107) campaign days and a record beet sugar production volume of 5.7 (4.4) million tonnes, we more than reached our goal.
Managing a 30 % year-over-year increase in sugar volume – from the field right to the end customer – required extraordinary efforts along the entire value chain; from beet growing through production, sales and logistics. Once again, we can be very proud to confirm the impressive performance of our beet growers and employees.
Now that production quotas are a thing of the past, we have new opportunities to export sugar, and we must take advantage of these. To do so, we have identified attractive markets; among others, the Middle and Near East, North and West Africa, Eastern Europe and Central Asia. The Far East also always presents an opportunity. We have established a multinational distribution organization to manage this side of our business. Named Global Markets, it has passed its first practical test and significantly driven exports. To enhance our volume management, we have also rented silo storage capacities at European harbors, additional warehouses for packaged goods and leased block trains designated specifically for Südzucker. From mid-September 2017 to the end of January 2018, we shipped large volumes of bulk sugar by rail to various seaport terminals in France, Belgium, Germany and Poland. Most of this sugar originated in Belgium’s and Germany’s sugar factories.
The experience gained during the last campaign is now helping us prepare for the next campaign, for which we have fortunately been able to sign contracts for a beet volume equal to that in 2017. We are also playing close attention to transport capacities so that we are able to secure adequate shipping capabilities for the sugar we produce early and boost loading flexibility.
As expected, all other European sugar producers also expanded production. But above all, most other regions around the world – especially India – were able to boost production, weather conditions permitting. As a result, after two years of declining world market inventories, sugar stocks began rising again as more sugar is produced than consumed. These additional volumes drive down world market and European price levels. Nonetheless, we regard this new situation as an opportunity and above all, a chance to show our customers around the world that we are a reliable partner. At the same time, we continue to work on strengthening our European market position.
Expressed in numbers, we increased the sugar segment’s revenues to € 3,017 (2,776) million and nearly doubled the operating result to € 139 (72) million. The sugar price collapse mentioned earlier did not impact the results until the second half of fiscal 2017/18, but will weigh especially heavily on this fiscal year's result.
Current public perception is that our product sugar is to blame for almost all health problems. Our message is that overweight and societal illnesses are caused, not by a sole food ingredient such as sugar, but instead by a diet where more calories are taken than the body consumes. There are multiple reasons why more and more people in modern society have difficulties maintaining precisely this balance, which is why any approach that focuses on blaming a single food ingredient for obesity will necessarily fail. Traffic light labeling, sugar taxes or similar schemes will not produce the desired results. The cards inserted at the back of this report rebut conventional wisdom about sugar and diet in a light-hearted fashion.
The special products segment's growth was driven by the Freiberger Group acquisitions. Freiberger's takeover of HASA GmbH in Burg, Saxony-Anhalt, Germany positions it to increase its share of the stone oven pizza market in Europe, which continues to expand. The acquisition of US-American company Richelieu Foods Inc. has enabled Freiberger to enter the US market. With five production locations, it is the country’s market leader in the private label pizza sector. The private label market share of the total market in the United States is still very small compared to Europe and offers growth opportunities.
As expected, higher raw material prices in all of the division’s segments caused its operating result of € 158 (184) million to be significantly lower than last year's strong posting, despite having generated higher revenues of € 1,997 (1,819) million.
Higher raw material prices also had a very noticeable impact on CropEnergies. Combined with falling ethanol prices in the second half of the fiscal year, they drove the operating result down significantly, to € 72 (98) million. We are pleased that the plants performed well, production and sales volumes rose and that the segment was able to generate significantly higher revenues of € 808 (726) million.
The fruit segment continued to grow and expanded successfully in India and China. At the same time, the strategy to gain further market shares literally bore fruit. Overall, the fruit segment reported slightly higher revenues of € 1,161 (1,155) million and an operating result of € 76 (72) million. It could have been even better, had their not been a historically poor apple harvest in Europe with correspondingly high prices, which led to significant underutilization of our European fruit juice factory capacities.
Dear shareholders, this completes my brief review of the fiscal year just ended. Let us now have a look at the current fiscal 2018/19 year.
Based on developments in the sugar segment since October 2017, we can already anticipate that fiscal 2018/19 will be a difficult year for this segment. Sugar production around the world has grown at a faster pace than consumption, the euro to dollar exchange rate is very unfavorable for us and world market and European sugar prices are currently only heading in one direction: down. In fact, the EU sugar price slid to a historic low at the beginning of calendar 2018.
However, we believe that at current world market price levels, many producers cannot be profitable, so volume and price adjustments are only a matter of time, especially since annual global demand for sugar continues to grow.
Even though this dramatic price collapse was not foreseeable, the general situation does not surprise us. You may recall that as early as in 2013, when the EU announced its decision to eliminate the EU sugar quota system, we communicated that we would face a transition phase of at least two years following October 2017. Accordingly, we continue to pursue our programs of cutting costs and boosting efficiency along the entire value chain.
An important success factor for our group is forward-looking investment in capacity expansion, new plants and logistics projects; for example, the bioethanol plant expansion in Zeitz, Germany, construction of a second fruit preparation factory in China and the wheat starch plant expansion in Pischelsdorf.
Our diversification strategy will pay off. We are forecasting higher results for the fruit and special products segment. Although these will not offset declines in the sugar and CropEnergies segment, they will at least mitigate them. We currently expect the consolidated group operating result to range between € 100 and 200 million. As in other years, the result will be influenced by strong volatility in the sugar and ethanol markets.
Südzucker's share price reflects these expectations and forecasts. The declining value of the stock also impacted the company’s market capitalization and thus our MDAX® listing. Even though an index listing has no immediate impact on our business operations, we regret that Südzucker shares were demoted from the MDAX® to the SDAX® in March of this year.
It remains essential that Südzucker maintain its outstanding reputation and excellent access to capital markets. This applies to both equity and debt capital. The confidence of the capital markets in the future growth of our company can also be seen in the successful placement of a € 500 million bond in fall 2017 with an interest rate of just one percent.
More than ever, we need committed and motivated employees who are prepared to take on the challenges with us, so that we may guide the company through these difficult times. We greatly appreciate the work done last fiscal year and at this juncture would like to thank all of our employees.
Honored shareholders, the same way we are counting on our committed employees during the difficult times ahead for our company, we trust in your loyalty and thank you for your solidarity.
Yours truly,
Südzucker AG
Executive board